Sales tax nexus is just the more recent issue plaguing peer-to-peer platforms, which have been struggling with tax issues since their inception. June 2018 added a new problem to the mix, when the Supreme Court held in South Dakota vs. Wayfair that states could require businesses to collect and remit sales tax when certain economic thresholds were met. Previously, a business had to be physically located in a state in order for that state to impose its taxing jurisdiction upon it. The first problem this new law introduced to the sharing economy was identifying where, if anywhere, the sales made through the peer-to-peer business surpassed any of the new economic nexus thresholds. Then, the issue of who is responsible for compliance (registering, collecting and remitting the sales tax) must be resolved.  

Physical Presence

Peer-to-peer business models rely on a high volume of individual participants. As such, it is easy for peer-to-peer businesses to have a physical presence in many states. Prior to the rise of economic nexus laws, the standard rule for determining when a business was required to comply with a state’s sales tax laws was “physical presence.” The physical presence rule, in short, was that if a business, its inventory, or its employees or agents are physically located within the boundaries of a state, then the business was required to comply with that state’s sales tax laws.

The question became whether peer-to-peer businesses need register only where they are physically located, which could be only one state, or whether the service providers on their platforms qualified as agents of their business who in turn established physical presence?

There are positions for both sides of this argument. On one hand, the nature of the relationships seems to suggest that the service providers are in fact agents on behalf of the peer-to-peer business, making sales for the peer-to-peer business rather than for themselves. The counter argument to that would be that the peer-to-peer business is simply a broker and that each service provider is a separate business that needs to register, collect, and remit when applicable. Unfortunately, this issue has yet to be litigated, so many peer-to-peer businesses choose the more conservative approach of assuming their service providers create physical presence.

The physical presence rule is especially relevant for businesses that operate similarly to Uber or Airbnb. The nature of their business requires a service provider and customer to be located in the same place. While large businesses such as Uber and Airbnb have mostly resolved their sales and use tax issues, small or start-up peer-to-peer businesses will likely be substantially affected as they grow. Imagine, for example, that a driver in Florida picks up a Florida customer within the state, but then drives the customer over the state border into Georgia. By providing this interstate service, a single driver could potentially cause the entire peer-to-peer business to have nexus with Georgia! Individual incidents could create nexus until the company either grew into every state or voluntarily registered. While this is an extreme hypothetical, it shows the burden that a physical presence standard may impose on a growing peer-to-peer business if service providers are considered agents on behalf of a platform. The physical presence problem persists despite the new nexus laws that have been added into the mix. Shared economy businesses must therefore pay close attention not only to where their business expands, but also where their service providers are located, in states that remain unclear on the sales tax treatment of peer-to-peer businesses.

Economic Nexus

Peer-to-peer businesses offering online services, such as Fiverr, likely do not have the physical presence of other shared economy businesses such as Uber or Airbnb. These businesses instead link together a service provider with a customer for remote services through their platforms. Therefore, the service providers and customers are not necessarily located in the same state. While physical presence may be established by the service providers and the platform itself, customers do not create physical presence and therefore do not create nexus. As such, peer-to-peer businesses offering remote services likely have registered in states in which they are physically located and possibly where their service providers are physically located too.

However, the new economic nexus laws may require these kinds of peer-to-peer businesses to register in states where their customers are located as well. Economic nexus laws establish a threshold that usually has a gross receipts or transaction total which, if surpassed within a one-year period, will likely trigger nexus. These thresholds vary quite dramatically across the country, but the most popular one is $100,000 or 200 separate transactions within a calendar year. In short, if a taxpayer makes $100,000 in sales or 200 separate transactions into a state, nexus attaches and they are required to register, collect, and remit going forward in that state. States take different positions as to how soon businesses need to register after surpassing the threshold, but taxpayers should generally prepare to act quickly once nexus is established.

As mentioned above, these new economic nexus laws can vary substantially state to state. Some states have a threshold set purely on sales while others require something additional, such as solicitation of sales within the state. Even those with pure sales thresholds will have different gross receipts or transaction amounts that must be paid careful attention to. Shared economy businesses offering remote services will need to closely monitor these rapid changes in the laws and make sure they are prepared for the compliance burden that will follow once nexus attaches.

Marketplace Nexus

Once a physical presence and economic nexus analysis has been performed to determine whether the transactions made on the peer-to-peer platform are taxable in each state, businesses must then determine who is responsible for the tax. On the one hand, sales are made through the peer-to-peer platform and the business does get a portion of each sale made through their website. On the other hand, it is the service providers who are advertising and selling their services through these platforms.

Early into the trend of economic nexus legislation, states realized that going after individual Lyft drivers or Airbnb hosts, for example, would be cost prohibitive. Most service providers do not make substantial sales and the cost of conducting an audit would outweigh any taxes received individually from most sellers, even if the cumulative taxes from all service providers is substantial. Realizing it would be substantially easier to audit a platform, rather than all its users, states began implementing marketplace nexus.

Marketplace nexus adopts the theory that the peer-to-peer platforms are in fact the retailers of the items or services sold. In other words, a customer buys their product on Amazon, or rents their accommodation on Airbnb, or purchases a driving service from Uber or Lyft. Therefore, those platforms are making the retail sales subject to sales tax. This way is certainly easier for states to audit these sales, but it creates some lingering questions. If the platform is the retailer, what exactly is the service provider? A wholesaler?

You might think the peer-to-peer businesses would fight back. After all, they are simply brokering a transaction between the service provider and the customer and retaining a portion of the sales for their services. However, the opposite of that has been true. Marketplaces have been lobbying for these marketplace facilitator nexus laws and have done so primarily for two reasons: (1) it prevents customers from leaving their platforms for fear of future audits and (2) it creates a new business opportunity for platforms to charge service providers for the tax compliance burden they will shoulder on the providers’ behalves.

Prior to the enactment of these new marketplace facilitator nexus laws, Airbnb started a campaign of working with states and localities to collect and remit on behalf of their hosts. Afraid hosts would leave the platform if they thought they may be audited, Airbnb tried to solve the problem before it hurt their business. The long, tedious process of negotiating deals with each state and locality was a burden that only a peer-to-peer business as large as Airbnb could absorb. Many were left wondering what mid and small sized businesses could do to come to the same arrangement in a simpler way. Fortunately, with the platforms seeing a new business opportunity and the states looking for an easier way to audit these sales, it seems like marketplace nexus may be the solution everyone has been waiting for.  

Additional Resources

Is Software as Service Taxable?, By Jeanette Moffa, May 4, 2019
Are Software Subscriptions Taxable?, By Jeanette Moffa, May 1, 2019
Sales Tax Changes for Fulfillment by Amazon Sellers, By Jeanette Moffa, May 6, 2019

Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.